By Erik Solheim, Head of UN Environment
Pensions, by their very nature, have to be sustainable. After all, they’re supposed to provide a measure of long-term certainty in an uncertain world.
Much of the world’s working population counts on this basic premise as they seek to build a nest egg for later life. Rather than stash their cash under the mattress, they put their faith in investment funds making what they hope are healthy bets.
Naturally, the assumption would be that pension funds are investing in sustainable businesses, or those that contribute to a healthy planet -- the kind that will still be in good shape for when retirement comes. This has not always been the case, but change is coming.
As stewards of such large pools of capital, pension funds must meet the needs of current retirees whilst also ensuring future retirees will have both sufficient funds and a viable environment to retire in.
Much attention has focused on the first half of this statement, especially amid concerns that pension funds may not be able to meet their liabilities and be able to pay the pensions of current retirees due to changing interest rates, longer life expectancy, and the recent financial crisis. But the second part of the question – that of a viable environment – has been overlooked.
Pension funds, however, have a responsibility, known as “fiduciary duty”, to make prudent, un-biased decisions on behalf of, and in the interests of, their beneficiaries. Being a prudent investor requires consideration of all long-term investment value drivers – including environmental and social risks as well as opportunities – that may affect the performance of a company.
We’re beginning to see this emerge as a major consideration.
Put together, the world’s largest pension funds manage almost half of the global investment market, estimated at around $85 trillion, and the decisions they make have profound implications. Their impact in the boardroom is also enormous: last year, for example, shareholder pressure pushed ExxonMobil to disclosing its exposure to climate change.
This is because the negative socio-economic effects of climate change are already being felt. Extreme weather-climate events cost the United States over $300 billion last year alone. Pollution crises – estimated to cost $4.6 trillion per year (6.2 per cent of global economic output in 2016) are increasing.
These issues have not gone unnoticed by governments and policy makers, and regulatory pressure is rising. Today, there are more than 300 sustainable investment-related policy tools and market-led initiatives, more than half of which were created in the last few years. Measures adopted include pension fund disclosure requirements and regulations encouraging pension funds to adopt responsible investment practices.
For more than a decade, UN Environment Finance Initiative (UNEP FI) has been researching and advocating for the intrinsic role of investors in fostering a sustainable world. The Fiduciary Duty in the 21st Century programme was founded on the realization that there is a general lack of legal clarity globally about the relationship between sustainability and investors’ obligations. Two years into the project, over 400 policymakers and investors in more than a dozen markets have been engaged with and interviewed to raise awareness of the importance of sustainability issues to the duties of investors.
Regulatory momentum is now global, with examples of action in Europe, Brazil, the UK and China. In Europe, the European Commission’s Action Plan on Sustainable Finance includes a legislative proposal to clarify investors’ legal obligation to consider sustainability factors in investment decisions. A change of this nature – simultaneously across the entire European investment chain – would constitute a key milestone towards the transition to a sustainable financial system.
In Brazil, the Superintendence of Private Pension Funds (PREVIC), the closed pension funds regulator, has approved a revision which will clarify requirements for investors to integrate sustainability issues into their investment practices and processes.
In the UK, the Pensions Regulator has updated its guidance for defined benefit pension funds, and taken an increasingly strong stance on environmental, social and governance risks. At the 2018 Trades Union Congress pensions conference, the Tory MP and Minister for Pensions and Financial Inclusion, Guy Opperman, stated, “I want us to make clear that trustees must take account of financially material risks, such as climate change”.
In China, the Securities Regulator (CSRC) is setting up a mandatory environmental reporting framework which will apply to all listed companies by 2020. This will provide a strong push for ESG integration for investors, complementing the recent achievements of the national Guidelines on Establishing a Green Financial System in China.
Industry leaders are already beginning to embrace the modern interpretation of fiduciary duty, and are aligning investment strategies with long-term sustainability goals. Greater interest in investment like wind and solar are emerging. Last year, Norway’s sovereign wealth fund, the world’s largest with over a trillion dollars under management, proposed cutting its investments in oil and gas companies. Norges Bank Investment Management (NBIM), a UNEP FI member and the arm of the Norwegian Central Bank that manages the fund, believes this would make it “less vulnerable to a permanent drop in oil and gas prices.”
They have recently joined the group of UNEP FI investors piloting the implementation of recommendations made by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) to report on their strategic exposure to climate-related risks and opportunities.
Other public sector investors are taking action: Japan’s Government Pension Investment Fund (GPIF), the world’s largest, announced in July 2017 that it plans to increase its ESG asset allocation from 3 per cent to 10 per cent. At the start of the year, New York City announced that it would be divesting USD $5 billion of its pension funds from fossil fuels in an effort to “stand up for future generations.” Honouring its fiduciary duty, the city’s pension funds intend to promote sustainability whilst also securing retirement for its beneficiaries.
But although progress around the globe is encouraging, investors must pick up the pace.
Today, 2,000 financial institutions are committed to responsible investment – the integration of material sustainability factors into investment decision-making processes – and are signatories to the Principles for Responsible Investment (PRI). Despite such commitments, implementation is not systematic.
Despite evidence that there is value in investing responsibly, only a handful of pension schemes consider sustainability factors in their investment processes. Today, for example, just 5 per cent of EU pension funds have considered the investment challenges posed by climate risks to their portfolios.
Despite risk of breaching their fiduciary duty, many investors do not consider sustainability factors in their decision making. Yet, failing to consider all long-term investment value drivers, including environmental, social and governance (ESG) issues, is a failure of fiduciary duty.
It is time for pension funds to rise to the occasion promoting prosperity whilst protecting the planet and its people. This year must be the turning point for all institutional investors to fulfill their responsibilities by incorporating environmental, social, and governance factors into their processes, prompted by regulatory clarification around investor duties and sustainability.
If not, what condition will the world be in for us to retire in? Is it about time you asked the manager of your pension fund, how sustainable your pension is?
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